Regulator berates bankers for overdraft fees

OCC’s Walsh: Overdraft protection shouldn’t be used as credit product

By

RonaldD. Orol

WASHINGTON (MarketWatch) — A top bank regulator on Wednesday charged that some community banks abuse overdraft protection programs to the detriment of consumers who don’t realize they have better credit options.

“We believe that this [overdraft protection] is a legitimate product if it is used properly. By “properly,” I mean that it should be offered as a convenience to customers that is used sparingly, not operate as a thinly disguised credit product that consumers use routinely as an alternative to payday loans or other such products,” said John Walsh, Acting Comptroller of the Currency at a community bankers event in San Diego.

“The bottom line here is that community banks that have encouraged customers to become overly reliant on this product to manage their cash flow will need to find other sources of revenue to offset an almost certain decline in the income they have been generating from overdraft protection fees,” Walsh added.

Walsh’s comments come after Federal Deposit Insurance Corp. Chairwoman Sheila Bair was criticized by community bankers at an American Bankers Association event on March 16, in part, for new standards the FDIC is implementing requiring certain community banks to monitor for excessive use of overdraft protection and reach out to these consumers to explain to them that they have lower cost alternatives. Read about Bair tackling hostile bankers.

Specifically, the FDIC is issuing guidance that community banks that engage in “robo” automated overdraft fee assessment, to monitor for overuse of overdraft protection. Roughly 40% of community banks employ these kinds of automated overdraft fee assessment systems.

“We’re asking banks to do what they do best. Do you want people to be paying thousands a year for overdraft protection? Is that good banking? All we’re asking is identify who those people are and make sure they understand what they are doing. If they can qualify for a line of credit talk or savings account, talk them through that. That’s what we’re asking community banks to do,” Bair told bankers at the ABA event.

One banker, expressing concern about the measure, said bank customers have personal responsibility and the expected guidance “troubles” him.

“While I understand that some in our industry have taken advantage of overdraft programs, we are not writing the checks. Our customers are making the decisions to write the checks. This is systemic in our society. We own personal responsibility for our actions,” he said to significant cheers at the ABA.

Bernanke also in San Diego

Federal Reserve Chairman Ben Bernanke, at the same event, took a different tack, telling bankers that the Dodd-Frank Act imposes tougher restriction on larger banks than on the smaller ones represented by the audience, citing as one example the Volcker rule limiting private-equity and hedge-fund investment and proprietary trading.

Bernanke said the central bank was working on implementing provisions of the Dodd-Frank Act to make a safer financial system, including imposing new capital standards and the ability to resolve rather than bail out a systemically-important financial firm.

“Resolving a large, multinational financial firm safely will likely always be a difficult challenge, and a great deal of work remains to be done to make these new authorities fully effective. Ultimately, though, these changes will mitigate moral hazard in our financial system by reducing expectations of government support by the creditors and counterparties of large firms,” he said, according to a transcript of his remarks prepared for delivery.

He added the performance of community banks is improving.

“Although we are not yet where we would like to be, the good news is that many community banks are recovering and reporting stronger performance,” he said.

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